Yahoo and Microsoft may have a past, but that doesn't mean they aren't working …

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After the messy breakup between Microsoft and Yahoo, most observers never expected the two to get back together. But after a brief rebound fling with Google that eventually went sour, it seems as if Yahoo has been driven back into the comforting arms of Microsoft—at least according to the latest rumors. Over the weekend, news leaked that Microsoft was in new talks to buy Yahoo's search business for $20 billion, but the two companies aren't ready to discuss any possible deal just yet.

Sources speaking to The Sunday Times claimed over the weekend that Microsoft was working on a deal to acquire Yahoo's search business and infuse it with new management, headed up by former AOL CEO Jonathan Miller and former Fox Interactive Media president Ross Levinsohn. Supposedly, Microsoft would get a 10-year operating agreement to manage the search business with a two-year call option to buy it for $20 billion. Yahoo would retain control of its other services, such as e-mail, IM, and other content services. According to the report, senior directors at both Microsoft and Yahoo already agreed to "broad terms," but a final deal had yet to be nailed down.

Unsurprisingly, neither Yahoo nor Microsoft are talking to the press about it. Both Microsoft and Yahoo responded to our requests for comment with a flat "no comment."

Now, with former Yahoo CEO Jerry Yang gone and Microsoft's Steve Ballmer hinting that a search deal could still be a possibility, it's likely that the two companies are indeed trying to work something out. And if Yahoo wants to right its sinking ship, it had better move fast, because there aren't likely to be many other suitors in tough economic times.

Would this deal actually help Yahoo stay above water? As things currently stand, the company is steadily losing search share to Google, and the failure of the deal between these two competitors means that Yahoo won't have the cash it planned on using to improve its search offering. So giving up on search might not cost the company as much as it might have a year ago.

Meanwhile, an infusion of cash might enable it to make an acquisition (the remains of AOL have been mentioned) that strengthens the parts of its business that are performing better, like display advertising and its portal traffic. Alternately, with ad revenue dropping during the downturn, an infusion of cash might simply act as a bridge over the rough economic waters.

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Jacqui Cheng
Jacqui is an Editor at Large at Ars Technica, where she has spent the last eight years writing about Apple culture, gadgets, social networking, privacy, and more. Emailjacqui@arstechnica.com//Twitter@eJacqui